Adens' Forecast: Stick with Bonds

04/28/2014 9:00 am EST

Focus: ETFs

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

We recommended buying bonds earlier this year and we still believe they’re a good investment. Our charts and leading indicators are also reinforcing this, explains Mary Anne and Pamela Aden, editors of The Aden Forecast.

Five years of zero interest rates and over $4 trillion in bond purchases simply hasn’t been enough to really boost the economy, ward off deflation, and fuel inflation, like the Fed wants.

That’s one important reason why we believe interest rates are going to fall further, at least, in the months ahead. In other words, bond prices are headed higher and this will likely continue well into next year.

The mega trend for long-term interest rates remains down. The yield for 30-year bonds is also below its 15-week moving average, signaling long-term interest rates are now headed lower.

The 10-year yield is indicating the same. It too resisted at a six year downtrend and its leading indicator has room to fall further before rates are too low. So, it’s also telling us that interest rates are poised to fall further.

Plus, this is happening not only in the US, but around the world. Rates have been coming down this year in all of the major developed countries.

That’s mainly because of the lackluster growth in most countries, along with low inflation. In other words, it fuels concern that deflation is gaining the upper hand, which has indeed been the case.

The world wants inflation, maybe not rip-roaring inflation, but at least some inflation to offset the deflationary pressures. But as long as deflation is in the driver’s seat, the world is worried about a Japanese repeat.

They saw what happens once deflation sets in. It was the dominant force for decades. The Japanese couldn’t shake it, despite zero interest rates for nearly 20 years.

The bottom line and the lesson here is that interest rates will stay low if deflation pressures persist. That’s already been happening for the past five years, ever since the 2008 recession, and despite what the Fed and other central bankers say, it looks like low rates will continue for the time being.

For now, interest rates are under downward pressure and bond prices are headed higher. Bond prices are bottoming, and once they break above their moving average, there’s a good chance they’ll likely continue up to near their 2012 highs.

The 30-year yield recently hit a ten month low and the 10-year yield is following. Both are set to fall further in the months ahead. This will be reinforced once the 10-year yield declines and stays below 2.60%.

Since bonds are a safe haven, this could be in reaction to global tensions, such as Russia, or simply because the economy needs more stimulation to keep it on track.

In either case, it’ll mean good gains for bond holders and that’s why we recommend buying and keeping 15% of your total portfolio in long-term US Government bonds.

Continue to buy and hold over 10-year US government bonds. Bond ETFs are probably easier to buy for most investors. But you can also buy the individual over 10-year bonds outright.

If you go the ETF route, the ones we recommend are the iShares 20+ year Treasury Bond (TLT), iShares 10-20 year Treasury Bond (TLH), Proshares Ultra 20+ Year (UBT), and Pimco Intermediate Muni Bond Strategy ETF (MUNI).

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